Emerging Markets Report - July 2010
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21 Iulie 2010 |
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RAIFFEISEN BANK S.A. |
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Regional overview
More price losses for equity and commodity markets – worries about the looming economic slowdown
Following the sharp losses for equities at the global level in May, the stock markets attempted a come-back in June. But by the end of the month, this rebound had pretty much collapsed everywhere, and consequently most equity markets booked losses of 3%-6% in June. Although the jitters about the sovereign debt situation in Greece and other Southern European countries have eased somewhat, there is still uncertainty on the markets and this is likely to remain the case for a good while. Following some initial stabilisation, Greek government bonds lost more ground, despite the bail-out promise from the EU, IMF and ECB, and the last of the three major international rating agencies has also now downgraded Greece to "junk" status.
Southern European government bonds lost more ground versus German bonds despite the safety net
Government bonds from Spain, Portugal, Ireland and Italy also came under more pressure. Additionally, the equity markets were increasingly hampered by worries about the sustainability of the global economic recovery, particularly in light of the data on the Chinese economy, which recently pointed to a slowdown in activity. While the US data still indicate more vigorous growth for the months ahead, there have already been some disappointing numbers on the labour market, house sales and retail sales. As government stimulus measures run out and tax hikes appear on the horizon in the USA, a slowdown in US economic growth appears almost unavoidable in 2011. The question of course is: How much will growth slow down? Most analysts are favouring a scenario featuring low, but still positive growth right now. It is possible, however, that the economy will slip into recession again (double dip), especially in light of the sharp increase in the tax burden in 2011.
G-20 summit highlights deeply divided opinions in the major economies
At the latest G-20 summit, there were once again massive differences of opinion between the leading industrialised nations. While the USA and other countries are calling for more economic stimulus programmes and want to postpone savings, Germany in particular is making it clear that it sees no further leeway for such expenditures and feels that strict savings measures must be taken in order to prevent an explosion in global sovereign debt. In the end, agreement was reached to halve public deficits by 2013, with this essentially representing the smallest common denominator for the G20; it will also remain to be seen if this goal is actually achieved or not.
The oil catastrophe in the Gulf of Mexico is taking on greater and greater proportions. Its potential consequences for the global oil and energy industry and also for the financial markets are hard to imagine so far. Right now, the financial might of the BP Group should be sufficient to cover the resulting costs and compensation payments. But if the well cannot be capped soon, the vast costs of the catastrophe may even finally overwhelm BP's financial powers.
On the whole, there was more deterioration in risk appetite at the global level in June, which led to falling prices for other risky asset classes as well, such as commodities and corporate bonds. In turn, US Treasuries and German government bonds profited from their status as a safe haven and from the gloomier global economic outlook. The euro was able to end its plunge against the US dollar, but there is still no sign of a turnaround.
The economies in Central and Eastern Europe are still showing clear indications of recovery. The resurgence in industrial production in the “old” EU member states is having a positive impact on the Eastern European economies and is generating a rise in exports. Stronger efforts to consolidate budgets, however, will seriously hamper economic growth in the EU in the years to come. For the Eastern European economies, this means that the medium-term growth prospects will also become gloomier again, due to their close economic ties with the euro area. As a result, domestic demand will have to take over an increasingly strong role in sustaining the economic recovery in the CEE countries.
Country focus
Russia
Falling commodity prices and discussions about tax hikes for oil&gas companies weighed on Russian stocks
The Russian economy continues to stabilise. The purchasing managers' index for the manufacturing sector increased again recently and is now firmly over the 50 mark, indicating expansion. Unemployment has continued to fall, and both retail sales and disposable income are reflecting more significant increases compared to last year. On the whole, the economic data remain positive. The rouble depreciated against the EUR-USD currency basket in June, even though oil prices edged slightly higher. Nonetheless, the correlation between the Russian currency and the price of oil remains strong. Russian LCY bonds posted gains for the month. Yield premium on Russian government and corporate bonds over EMU government bonds remained relatively stable in June, after having increased quite significantly in the previous month.
Despite some attempts at a rally, the equity market booked more declines in prices, especially towards the end of the month. Oil&gas shares were hindered by speculation about the threat of significant tax increases. In the field of electrical power supply, the liberalisation of prices planned for 1 July was surprisingly delayed by the government for at least 6 months, which generated pressure on shares in electric utilities. Both of these issues underline the significant ongoing political risks and uncertainties in Russia.
Hungary
Budget deficit target confirmed at 3.8% of GDP for 2010. Plans for a new banking tax
In early June, negative headlines on Hungary's solvency and the possibility of a significant increase in the budget deficit triggered strong fluctuations in the country's currency and bonds, until the Fidesz government helped ease the situation by presenting new savings measures. The attention of many market participants was thus focused on the budget deficit agreed with the IMF, which was confirmed at 3.8% of GDP for 2010. Even though Hungary does not intend to use the rest of the available funds from the current arrangement with the IMF according to PM Orban, the arrangement is to be extended until 2010. A new stand-by arrangement is planned for 2011. This would give Hungary some extra security and should have a positive impact on Hungarian assets. The new government announced tax breaks on the one hand, and a new bank tax on the other. With this new tax, banks are to pay up around HUF 120 bn in the next two years. The rate of inflation in Hungary declined further in June and in view of the massive output gap no sustained demand-side inflationary pressure is expected in the immediate future. Due to the pressing need to consolidate its budget, Hungary was one of the countries in the region which was hit hardest by the global economic crisis. Economic growth is now back in positive territory, supported by better foreign demand, which has been reflected by rising industrial production and a positive trade balance since the beginning of the year.
The forint was one of the weakest currencies in the region in June. The rate-cutting cycle of the Hungarian central bank may be over now: at its meeting in late June, the central bank left its key rate unchanged again at 5.25%, in line with expectations. Yields on Hungarian government bonds once again rose relatively strongly in June, showing intense volatility. Over the long term, the level of Hungarian yields still looks attractive. Nevertheless, prices will remain volatile, particularly in light of the lack of clarity about the new government’s reform plans.
In line with the trend on the other stock markets in the region, Hungarian shares continued to lose ground in June and ended the month just slightly higher than the year-to-date low point from February. At the beginning of the month, stocks plunged on the back of the discussions about the country’s solvency and budget deficit.
Poland
The Polish zloty was very volatile in June again due to the general rise in market participants’ risk aversion, with the currency depreciating versus the euro. Prices on Polish government bonds fell during the month. Poland’s economy on the other hand is still looking robust. Increasing foreign demand fostered a surprisingly strong rise in industrial production and retail sales figures have also been stable. The rate of inflation continued to drop and is now even more clearly back in the central bank’s targeted corridor. As generally expected, the key rate was left at 3.5% and in the months ahead it does not look likely that there will be any change. During the second half of the year, interest rates may be hiked however, in the event of a sustained economic recovery and further rises in inflation rates. The successor to the late governor of the central bank, who was killed in the plane crash in April, is from the government’s party, pointing to stronger cooperation between the central bank and the government in the future.
Polish stocks moved broadly in line with the other Eastern European exchanges, posting a loss of around 6% in June. Foreign investors were generally selling, while domestic investors took advantage of the lower prices for buying.
